Ask Dave: Which Broker to Choose and Couch Potato Technique

A reader recently asked me:

I hope it’s not too much trouble to ask, but what broker or bank would you suggest that I use for my self-directed RRSP? I have Scotia bank for my mortgage, but TD looks like they have an interesting setup for the investor. Low fees and no fees are important to me of course, other vise it defeats the purpose. I plan on doing the “Couch Potato” approach so I should only be buying and readjusting once a year (no monthly purchases necessary).

Do you have any comments on the “Couch Potato” technique?

My answer:

I use E*Trade and their commissions are super cheap. I think TD will allow you to do “wash trades” where you sell a USD ETF and buy another one without having to convert to CAD. They will only do this over the phone, but I have heard that they will do it.

Re: Couch potato technique. I don’t know exactly what it is. It sounds like it involves putting your money into 2-3 index funds in some simple allocation like 33-33-33 or 50-50 and rebalancing only once per year. The most cost effective way to do that would be to save up cash throughout the year and then buy some investments (and sell if necessary) once per year to rebalance. Eventually your portfolio will become much larger than the cash you will put in annually so the “cash drag” is not that significant relative to the size of your portfolio. I agree that investing in low-cost passive investments like indexes are a great way to invest and also believe that everyone should stick to some initial asset allocation and rebalance when necessary. The couch-potato technique is not really much different from mine. I wait until I have over $2000 in cash in my RRSP rather than waiting until some anniversary date, so I end up buying more than once per year. I also try to rebalance my investments and I invest in index ETFs which are passive low-cost investments.